Canadian advertising agency Cossette Inc said on Monday it has accepted a sweetened bid from U.S. private equity group Mill Road Capital and it continues to recommend that its shareholders reject an unsolicited takeover proposal from Cosmos Capital.

Quebec City-based Cossette said its board has accepted the amended Mill Road proposal, which values the company at C$8.10 a share, or C$135.3 million ($128 million).

Earlier this month, Mill Road had reached an agreement with Cossette to buy the company for C$7.87 a share, trumping an unsolicited bid from Canada's Cosmos Capital worth C$5.25 a share.

Cossette, the country's largest home-grown ad agency, has been fending off Cosmos Capital's overtures since July. It rejected the company's initial proposal of C$4.95 a share and its subsequent sweetened offers.

In August, Cossette hired BMO Capital Markets as its financial advisor to solicit alternative proposals. Since July, Cossette shares have risen almost 150 percent and closed Monday at C$8.02 on the Toronto Stock Exchange.

Cosmos recently said it would match Mill Road's C$7.87 a share offer and indicated that it may even consider raising its bid to C$8.10.

A spokeswoman for Cosmos said the company is waiting for Cossette to file regulatory documents related to the new proposal before responding to Cossette's announcement.

We have to take stock (of the situation) and think it through with the documents in hand and understand them fully before we make any kind of decision or statement, said Sylvia Morin.

Morin said Cosmos is likely to issue a statement within a couple of days.

Cossette, which serves major transnational clients, including McDonald's, Bell Canada, General Motors and Coca-Cola, said its amended agreement with Mill Road includes a break-up fee of C$4.5 million.

The agency, which has offices in Canada, Britain, the United States and China, said it continues to favor the Mill Road offer as it is is not subject to due diligence, or financing conditions. Mill Road's proposal would also allow incumbent Chief Executive Claude Lessard to continue running the ad agency.

Cosmos said it did hold discussions with a special committee appointed by Cossette. The talks were with regard to Cosmos possibly raising its bid to C$8.10 a share, but no final resolution was reached.

Our correspondence with the special committee supported our ability to go to C$8.10 (a share) and that might have in fact triggered the (sweetened Mill Road) offer this morning, said Morin.

($1=$1.06 Canadian) (Reporting by Euan Rocha; editing by Rob Wilson)

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